Yesterday, we discussed how the U.S. is set to see a significant shift in its energy policy with the return of Donald Trump to the presidency.

His administration is expected to prioritize traditional fossil fuels like oil and natural gas, rolling back several initiatives aimed at advancing renewable energy and electrification.

Trump’s plans include lifting restrictions on liquefied natural gas (LNG) exports, supporting domestic drilling, and possibly eliminating tax credits for electric vehicle purchases.

These changes align with his broader agenda of boosting energy independence, reducing regulatory burdens, and revitalizing the fossil fuel industry.

This policy direction, combined with Trump’s promise to declare an energy emergency to bypass Congressional hurdles are great developments for E&P companies if they choose to begin deploying capital.

However, these policy shifts are even better news for equipment and services companies.

They now have the opportunity to make real money if the wildcatters of America finally let their animal spirits take over again.

Another name to benefit from these developments is Liberty Energy (LBRT).

The company specializes in hydraulic fracturing and shale completion services, making it an essential partner for exploration and production (E&P) companies.

These services are critical for getting wells operational and maintaining production levels, which is particularly important given the current global demand for oil and gas.

With high operating leverage Liberty can significantly increase its earnings with a relatively small increase in revenue, which is likely in a high-demand scenario.

Also, the company’s robust pricing power allows the company to pass on costs to customers, a vital feature when dealing with fluctuating market conditions.

Additionally, concentrated exposure to U.S. energy, particularly in prolific basins like the Permian and Eagle Ford, positions Liberty to directly benefit from the increased demand for domestic oil and gas production.

The company’s potential shines even brighter against the backdrop of the U.S. energy industry’s potential revival under a favorable political climate.

With the possibility of energy policies shifting focus toward domestic oil and gas production, Liberty’s business model is well-aligned to benefit from such trends.

Furthermore, the sanctions on Russian energy exports have accelerated the need for alternatives to fill global supply gaps. 

Pioneering shale basins that underwent years of production declines such as the Haynesville are experiencing a rebirth thanks to technological advancements like horizontal drilling and hydraulic fracturing.

As natural gas prices spike worldwide, these mature fields have become economically attractive to re-develop. 

Major operators are allocating rising capital expenditures towards re-activating dormant shale assets.

Recent investments have unlocked new geological zones using longer laterals and denser fracturing and Liberty benefited. 

We can see these factors already in effect…

The company has managed to increase its profitability in the last year. While it struggled in 2020 and 2021, the Uniform return on assets ”ROA” recovered fast and reached above 18%.

With the demand for energy coming from the U.S. not slowing down, we can expect the company’s Uniform ROA to reach above 20%, close to all-time highs.

However, the market is underestimating the ability of domestic shale production to bridge global supply gaps in the near term.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to fall from 18% in 2023 to 4%.

The market thinks the surge in the demand for U.S. energy is not sustainable in the long run.

The continued technological gains could unlock even greater shale resources, extending this renaissance for years to come.

As global energy security concerns drive demand for U.S. energy exports, demand for products and services from Liberty will remain high.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.